Attention on Stimulus Packages: EUR vs USD

After two challenging quarters driven by the coronavirus crisis, investors were gearing up for a recovery for the second half of the year. Governments and central banks have absorbed nearly all the shocks of the virus on the financial markets by injecting massive liquidity in the economy, keeping credit flowing and supporting their economy with huge fiscal stimulus plan among many others unconventional plans.

Despite promising updates around a potential vaccine by early 2021, new COVID-19 clusters around the world spark fears of a second outbreak and are reviving concerns of a deeper economic downturn.

Until the pandemic is not under tight control, the global economy is in need of more stimulus.

Stimulus Packages

Europe made history this week after the announcement that the leaders of the European Union agreed on a Recovery Package and European Budget. There were many “firsts” in this agreement:

• The first time in European history that we agree to borrow collectively to finance expenditure
• The first time that our budgetary funds are connected to our climate ambition
• The first time our budget will be directly linked to the rule of law

EU leaders agreed on a €750 billion recovery fund to address the impact of COVID-19 – the fund will be split into €390 billion in grants to member states and the remaining €360 billion in loans. Additionally, the leaders have agreed on a €1,074 billion long-term EU budget for 2021-2027. This unprecedented move has shown a “united” and “strong” committed that Europe needed right now.

In the middle of a crisis, Europe shows that they are standing together despite their disagreements and are jointly fighting for the recovery of the economies.

Investors are also expecting to see more stimulus coming from the US. Congress is still struggling to finalise the next stimulus package. Ideally, democrats and republicans will likely aim to pass the next bill before the one-month-long recess which will start in roughly two weeks:

• Both the Democrats and Republicans seem to be agreeing on the one-time $1,200 stimulus check.
• Unemployment benefits might be lesser as it is believed that the $600 a week can create a disincentive to go back to work.
• There is also a proposal for a “return to work” bonus as an incentive for recipients to go back to work.

Among many other proposed plans to help a pandemic-induced economy, investors are hoping that Congress will pass the new spending bill.

Share Market

On the reassurance that the intervention measures are not going to fizzle out anytime soon, investors have pushed global stocks higher. European bourses found support on the historic move made by the EU leaders. The sense of unity in Europe during such a crisis is driving European stocks higher. In anticipation of more stimulus coming from the US, Europe might stand out as it has the potential to bounce back better than the US.

Source: Bloomberg

At first glance, given that the US economy was thriving before the pandemic unlike Europe, it seems that US economy may recover quicker. However, Europe managed the crisis and had stricter lockdown measures that the US. The rising number of virus cases in the US is alarming and put the US on the back foot. Also, among other major developed countries, daily activity gauges show that EU countries are recovering better post-coronavirus and are ahead of the US, UK and Canada.

Source: Bloomberg

Among the European bourses, the DAX is seen as outperforming its peers. The rescue package from Germany and the EU landmark stimulus package has helped the DAX to make the fastest-ever recovery. The index is close to paring all the losses made earlier this year.

Source: Bloomberg

EUR v/s USD

The US dollar is dragged by concerns over the virus woes, uncertainty around the next round of stimulus package and escalating tensions between the US and China. President Trump warned that the virus situation is likely to get worse. As per Deutsche Bank Dollar Trade Weighted Index, the US dollar’s decade-long uptrend has been breached this week.

On the other side, the Euro was seen outperforming recently, lifted mainly by easing lockdown measures and the unprecedented recovery package deal and budget agreed by the EU leaders to support their economy. The EURUSD pair rallied to the highest level seen since 2018 on the back of some sort of stability in the EU.